ION Acquisition Corp 1 Ltd
NASDAQ:TBLA
Earnings Call Analysis
Q3-2023 Analysis
ION Acquisition Corp 1 Ltd
Despite the geopolitical tensions in Israel, where 10% of company revenue originates, the company's diverse revenue model has shielded its business from material impact. Notably, under 2% of revenue is strictly domestic Israeli revenue, emphasizing the company's global outreach.
The company's revenue hit $360.2 million in Q3, surpassing the guidance midpoint of $344 million, signifying an 8% year-over-year growth. Gross profit reached $100.7 million, while the Ex-TAC gross profit stood at $128.4 million, with both metrics beating guidance. Adjusted EBITDA soared to $22.8 million, eclipsing a mere $4 million midpoint expectation. Non-GAAP net income also defied expectations with a realized $6.7 million compared to an anticipated loss.
Positive free cash flow for Q3 was reported at $22.8 million, backed by operational prowess and efficient expenditure management. The robust cash flow facilitated a share repurchase program, with $19 million used to buy back shares, reinforcing investor confidence.
The company's disciplined approach to cost-cutting resulted in reduced operating expenses by $4.7 million year over year and a 6% decline in headcount since its peak in July 2022. This cost efficiency is part of a strategic path to achieve an adjusted EBITDA margin goal of over 30% by 2024.
A proactive stance on financial stability led to the repayment of an additional $50 million in long-term debt, bringing the total voluntary repayments since Q4 2022 to $141 million. Looking ahead, an additional debt reduction of up to $30 million is targeted for the first half of 2024.
Bolstered by year-to-date performance, the company uplifts its midpoint guidance for adjusted EBITDA to $75-$82 million and non-GAAP net income to $7-$12 million. Revenue forecasts are maintained at $1.438-$1.469 billion, with a conservative outlook amidst Israeli uncertainty.
For the fourth quarter, the company anticipates revenues of $418-$449 million, with an adjusted EBITDA of $26-$33 million. The acquisition of Yahoo's supply channels is set to boost revenues in Q4 and reach full potential by mid-2024, heralding a new epoch of growth for the company.
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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Taboola Third Quarter 2023 Earnings Conference Call. [Operator Instructions]At this time, I'd like to turn the conference over to Ms. Jessica Kourakos, Head of Investor Relations for the Safe Harbor.Ma'am, please begin.
Thank you, and good morning, everyone. And welcome to Taboola's third quarter 2023 earnings conference call. I'm here with Adam Singolda, Taboola's Founder and CEO; and Steve Walker, Taboola's CFO. The company issued earnings materials today before the market and they are available in the Investors section of Taboola's website. Now, I'll quickly cover the Safe Harbor. Certain statements today, including our expectations for future periods are forward-looking statements. They are not facts and are subject to material risks and uncertainties described in our SEC filings. These statements are based on currently available information and we undertake no duty to update them, except as required by law.Today's discussion is also subject to the forward-looking statement limitations in the earnings press release. Future events could differ materially and adversely from those anticipated. During this call, we will use terms defined in the earnings release and refer to non-GAAP financial measures. For definitions and reconciliations to GAAP, please refer to the non-GAAP tables in the earnings release posted on our website.With that, I'll turn the call over to Adam.
Thanks, Jessica. Good morning, everyone, and thank you, all, for joining us for our third quarter call.Before we talk about the business, I want to first address the war in Israel. These last few weeks have been incredibly hard for us as we continue to face unimaginable events. The safety and well-being of our employees is our very top priority and we have implemented multiple initiatives to support our people and their families during this crisis.I'm very, very proud of Taboola's tremendous resilience during this difficult time. Their work has been instrumental in keeping Taboola safe and in implementing our business continuity plans and it shows in our confidence in our future.As I think about our mission, it is clear to me now more than ever, how essential professional journalism is. Society needs thriving sources of truth we can all count on. And Taboola has always been and forever will be the biggest supporter of the open web publishers, and our commitment to them is more necessary than ever. Our alignment and win-win approach makes it such that when we do well, the open web does well, too.And now, let's turn into our business results, which I'm very proud of. Financially, we had a strong performance in Q3, beating the high end of our guidance across all metrics. We achieved $125 million in ex-TAC gross profit, $23 million in adjusted EBITDA and $23 million in free cash flow. We're also excited to raise the midpoint of our full year 2023 guidance for adjusted EBITDA and non-GAAP net income.Free cash flow over the last 12 months is $55 million, which is, 3x what it was a year ago for the same time period. 2024 is basically here. And given how we're executing on our key business priorities, we're reiterating our 2024 guidance of over $200 million in adjusted EBITDA and over $100 million of free cash flow.Last year, when we launched our new bidder platform with Microsoft as our design partner, many investors asked us how this new AI technology would affect Microsoft? We said, we believe it will make it a growing part of our business. And in Q3, I'm very happy to share that Microsoft is nearly 2x what it was last year at the same time.Yahoo integration is going well and is on track. Now I care about it not only because it's a good thing for Taboola and for our advertisers, but because it's also a big step towards making Taboola the first open web must buy ad platform; Google for search, Meta for social, Taboola for the open web. These were just some highlights from this quarter and why I'm happy with our momentum as a company.There are 2 main factors that drive Taboola's revenue. The first is our ability to reach users and deliver engaging experiences in the open web, so they spend more time with us and engage with our recommendation engine. The second is our ability to monetize our interaction with consumers also referred to as our yield.I said before that with just investing in yield on the same user base, we have now, I believe, we can double and triple Taboola's revenue. There's a lot of growth to be had here. Now, let's dive in and start with our ability to reach consumers and create engaging experiences.In our core business, working with publishers all over the world, we've seen strong momentum with publishers continuing to trust us and signed long-term partnerships. We saw strong renewals and net new wins such as Nexstar, Absolute Sports, Excite Japan and more. And many of our existing long-term partners renewed their partnership with us, publishers like Gannett, Cox Media Group, Sport 1, McClatchy, NDTV and more.Our core is going to get even stronger as part of our 30-year partnership with Yahoo, the fifth largest media property in the U.S. As of Q3, Taboola is now offering exclusive access to 100% of Yahoo's global native supply, which means that advertisers can now start buying on Yahoo through Taboola. And this is our main focus, migrating Yahoo, native advertisers and onboarding new ones.In addition, Yahoo DSP now has Taboola Ad Console integrated inside, and it looks awesome. That was the initial part of enabling Yahoo omnichannel advertisers to migrate to Taboola. And I can share with you that early results of migrated omnichannel advertisers are very promising.In summary, there's still a lot of work to do. But I feel really good about the progress so far and continue to expect to be fully ramped up by mid-2024.When you look beyond our core, working with publishers, we reach consumers on Android OEM devices as part of Taboola News. This business is becoming an important part of how Taboola reaches consumers and creates engaging experiences for them.Taboola News grew strong double-digit in Q3 and is on track to approach $100 million in revenue in 2023. In the quarter, we rolled that partnership with realme, one of the world's fastest-growing smartphones brand, adding more than 6 million devices to our existing reach. And this is on top of existing partnerships with companies like Xiaomi and Samsung, OPPO and others.Finally, we found ways to engage with even more consumers through our bidding technology, advancing our bidding technology and getting more advertisers, benefiting from it in Q3 provided us with ex-TAC improvement in the quarter.We've shared with investors that last year in April, Microsoft will be moving to our new bidding technology, which they helped us design and it will help us make Microsoft grow. And indeed, in Q3, as a result, the revenue was nearly 2x higher than Q3 of last year.Now that I've reviewed the first part of how Taboola grows its revenue by reaching consumers and creating engaging experiences, which is essentially our supply, let me move into the second way we grow revenue, which is by improving yield.As you know, half of our R&D is working on AI technology helping advertisers to succeed with Taboola. In Q3, Max Conversions went into general availability, which is a way for advertisers to share with us their objective as a business and let Taboola AI do the rest, no need any more for them to guess the CPC or anything of that kind, which is essentially how Google and Meta do it today.We're working deeply with Nvidia research team to advance our AI capabilities even further. And I'm happy to say that Max Conversion is now one of our fastest adopted technologies ever and we've seen encouraging results.In Q3, we saw meaningful improvement in net dollar retention for campaigns using Max Conversions, which is essentially the leading indicator we want to see and track. I believe that the majority of our revenue will be using this sophisticated AI in 2024.Our investments into Generative AI technology have had a good impact as well. We made our Gen AI offering available in July, helping our advertisers, many of which are self service, to create titles and thumbnails. I'm happy to say that Gen AI already represents over 2% of revenue from ads created in Taboola Ad.This week, we introduced a new feature called Taboola Generative AI Ad Maker, which allows advertisers to edit existing creative automatically instead of just creating images from scratch.As we've shared before, about 1/3 of our company's revenue came from self service advertisers. So we care a lot to make this as easy and an effective process as we can.While over 2% of our revenue is using Gen AI, 25% of all ad created from self service advertisers are made with our Gen AI. So overall, we're seeing clients adopting our Gen AI capabilities; which contributes to our efforts as a company to grow yield.Finally, one of our big investments to bolster monetization and drive yield growth is e-commerce. In Q3, we saw double-digit growth in e-commerce driven by strong momentum in Europe as part of our international expansion and Yahoo now being a new supply channel for our retailers in the U.S. Overall, we're seeing well over 100% NDR among top advertisers, which is just unbelievable.In summary, I'm very happy with where we are as a company, our performance in Q3 and our momentum heading into 2024, which is a big year for us.And with that, let me pass the call over to Steve to review our financials and outlook in more detail.
Thanks, Adam, and good morning, everyone. Before I dive into our financial performance, let me reiterate what Adam said about the war in Israel.It is so hard to hear the stories of this conflict. But like Adam, I'm amazed every day by the resilience of Taboolars' in Israel and the way our employees have continued to run our business under such trying circumstances. Israel is our largest global office with over 600 employees. And we have had over 100 who either were called into action in the reserves or had a significant other called into action.In terms of our business exposure, in Q3, we reported that approximately 10% of our revenue comes from advertisers with billing addresses in Israel. However, most of that revenue is what we call export revenue and is actually targeting consumers and publishers outside of Israel.In fact, less than 2% of our revenue is what we would consider domestic Israeli revenue, meaning, advertisers spending on Israeli publishers and targeting Israeli consumers. It is because of the diversity of our revenue model, business continuity plans and the amazing efforts of our employees globally that we have not seen a material impact on our business, though we obviously continue to monitor the situation.Now let me turn to our Q3 results and our forward-looking guidance. As Adam noted, our Q3 results beat the high end of our guidance on all metrics. We are also raising the midpoint of our full year 2023 guidance for adjusted EBITDA and non-GAAP net income and reiterating our 2024 expectations of over $200 million of adjusted EBITDA and over $100 million in free cash flow.In Q3, revenues were $360.2 million versus the midpoint of our guidance of $344 million. Gross profit was $100.7 million versus the midpoint of $89 million. Ex-TAC gross profit was $128.4 million versus the midpoint of $118 million. Adjusted EBITDA was $22.8 million versus the midpoint of $4 million. And non-GAAP net income was $6.7 million versus the midpoint of a loss of $14 million.I will note that the revenue performance shows a return to year-over-year growth of 8%. Our ex-TAC gross profit was roughly in line with last year, reflecting some margin compression due to the ad rate declines in 2022, which have since stabilized in 2023. We continue to expect ex-TAC to return to positive growth in Q4.Positive free cash flow of $22.8 million in Q3 was stronger than anticipated. 3 main factors drove this overperformance. First, our stronger-than-forecasted ex-TAC gross profit contributed to our adjusted EBITDA beat.Second, we did a good job of controlling operating expenses, which further enhanced our adjusted EBITDA performance. Both of these factors flowed through to operating cash flow and to free cash flow. Lastly, our Q3 free cash flow also benefited from the timing of our payables and from a delay in some capital expenditures. Both of these were temporary benefits that will reverse in Q4.As Adam said, our strong revenue and ex-TAC gross profit performance was driven by strength in our e-commerce, bidding and Taboola News businesses as well as relatively stable yields in our core business.E-commerce had double-digit growth in Q3, driven by strong momentum in Europe and the U.S. Revenue retention was well over 100% among top advertisers. In addition, we are seeing great success ramping Taboola's feeds and now Yahoo as supply channel for our retail advertisers.Taboola's feed supply is now at top 10 traffic source globally. We continue to forecast that Taboola News will approach $100 million in revenues this year versus $50 million in revenues in 2022.Finally, our bidding offerings continued to gain momentum. Microsoft registered nearly 2x more ex-TAC in Q3 2023 versus the same quarter last year, thanks to advances in our AI-powered bidding technology.Our teams have achieved this strong revenue and ex-TAC performance while improving cost efficiency, indicated by our adjusted EBITDA margin in Q3, exceeding the margin that was implied by the midpoint of our Q3 guidance.Operating expenses were $119.4 million in the quarter, down $4.7 million year-over-year. This decrease was primarily the result of our focus on cost reductions that we announced in Q3 of last year.Our headcount is down approximately 6% from its peak in July of 2022. With our ongoing expense discipline and strong growth expectations, we expect that in 2024, we will make significant progress toward our long-term adjusted EBITDA margin target of over 30%.GAAP net loss for the quarter of $23.1 million included amortization of intangibles of $16 million, share-based compensation expenses of $13.6 million and hold back compensation expenses related to the Connexity acquisition of $2.6 million, all of which were excluded from non-GAAP net income. Our non-GAAP net income of $6.7 million was above the high end of our guidance range.In terms of cash generation, we had approximately $32.5 million in operating cash flow in Q3, with free cash flow of around $22.8 million. This includes net publisher prepayments, which were a source of cash this quarter of $7.2 million and interest payments on our long-term debt, which were a use of cash of $4.8 million.I would like to note that net publisher prepayments were a source of cash for the second consecutive quarter. This was due to the fact that new prepayments were lower than the quarterly amortization of historical prepayments.Now, let's turn to the balance sheet. You can see that our net cash balance remains healthy. Cash and cash equivalents plus our short-term investments increased from $246.9 million at the end of Q2 to $250.7 million at the end of Q3 and remained above our debt principal balance of $202.7 million.I would note that the $202.7 million debt balance reported at the end of Q3 was before we repaid an additional $50 million in Q4, which I will discuss in a moment.The increase in our cash and cash equivalents balance was driven by our strong free cash flow performance of almost $23 million and includes approximately $19 million of share repurchases.I also want to provide an update on our share buyback and debt repayment programs. As you probably recall, we announced that we would buy back up to $40 million of shares in 2023 and that we intended to repay up to an additional $50 million of our long-term debt in the second half of the year.The share buyback program was initiated on June 1, and as of September 30, we repurchased a total of approximately 6.7 million shares at an average price per share of $3.45. We continued to repurchase shares in Q4. And as of Friday, November 3, we had repurchased a total of approximately 3.3 million additional shares at an average price of $3.69.Additionally, in October, we voluntarily prepaid another $50 million of our long-term debt, which means that we have voluntarily prepaid a total of $141 million since Q4 2022.We are also announcing an expansion of our share repurchase program of up to an additional $40 million as well as our intention to pay down up to $30 million more of our long-term debt in the first half of 2024. Both the share repurchase program and the debt paydown are contingent upon the availability of sufficient working capital.As an Israeli company, we are also required to obtain Israeli court approval for share repurchases. Our current approval expires November 16. And courts are currently operating at a limited capacity due to the war. But we expect to obtain approval once Israeli courts are back to normal operations.Now let me shift to our forward-looking guidance. For the full year of 2023, we are raising the midpoint of our adjusted EBITDA and non-GAAP net income guidance due to our strong operating performance year-to-date. We believe it is prudent to reiterate our full year 2023 revenue, gross profit and ex-TAC guidance given our desire to be more conservative in the face of greater near-term uncertainty given what is going on in Israel.We expect revenues of $1.438 billion to $1.469 billion, gross profit of $420 million to $436 million, ex-TAC gross profit of $531 million to $546 million. We are raising our adjusted EBITDA range to $75 million to $82 million and our non-GAAP net income to $7 million to $12 million.I will also note that despite 2023 being a year of strategic investment in Yahoo and in our growth initiatives, we expect to generate positive free cash flow for the full year.We continue to be very excited by the addition of Yahoo to our business. Adam mentioned earlier that 100% of Yahoo's global supply is now available to advertisers through Taboola's platform and we continue to focus on migrating advertisers.As we have previously stated, we expect the revenue to start ramping in Q4 in the double-digit millions of dollars range. And we'll expect to reach full run rate by the middle of 2024.Finally, we are issuing Q4 guidance. For Q4 2023, we expect revenues of $418 million to $449 million, gross profit of $132 million to $148 million, ex-TAC gross profit of $164 million to $179 million, adjusted EBITDA of $26 million to $33 million and non-GAAP net income of negative $3 million to positive $2 million.Let me finish by saying that we are happy with our third quarter performance and to be able to raise the midpoint of our guidance on adjusted EBITDA and non-GAAP net income for the full year. We are also excited about the step change we are expecting in our business as reflected by reiterating our 2024 targets of at least $200 million of adjusted EBITDA and at least $100 million of free cash flow.Perhaps most importantly, though, we are excited about the momentum we are building in our business. It is really amazing to start to see advertisers who previously spent their native budgets through Yahoo starting to use the Taboola platform and hearing them talk about their great experience.It is also great to hear stories of Taboola advertisers starting to spend money on Yahoo supply and being excited about the performance they are able to achieve. The additional scale that Yahoo will bring and the growth of our core business is helping us; in our progress towards becoming a must-buy for advertisers looking to reach consumers in the open web.With that, let me pass it back to Adam for some closing remarks.
Thanks, Steve. You've heard Steve and I share our point of view this quarter and how excited we are about our momentum. We beat the high end of our guidance on all metrics in Q3. We're laser-focused on growing our reach and engagement with consumers as well as our yield and we're doing a good job progressing those. Yahoo integration is going well and on track. Advertisers' success and yield growth gets a lot of our attention, with Max Conversions being adopted faster than anything we've ever done. 2024 is around the corner. And we're reiterating over $200 million in EBITDA, which is, nearly 3x our EBITDA guidance this year as well as over $100 million in free cash flow and another big step up from this year. All of which supports our plan to buy more shares back and prepay more debt.Taboola's mission is to make the open web strong and to empower editorial teams all over the world to provide trusted content in an engaging way that drives exciting growth to publishers and advertisers.As I stated in my shareholder letter, supporting the open web has never been as important as it is now. I'm proud to be part of Taboola. And I'm proud of our execution this year and our employees working passionately to pursue our mission.I'm sending our employees in Israel my prayers and my heart is with them every moment of the day. Thank you all for joining us today. We look forward to interacting with many of you over the next few weeks.With that, let's open it up to questions. Operator?
[Operator Instructions] Our first question or comment comes from the line of Jason Helfstein from Oppenheimer.
So 2 questions. One, just, Steve, maybe on the guide. So to the extent you're expressing a little bit -- some kind of conservatism there. How much of this is specifically to like, we'll call like the impact in Israel, like very company-specific or Israel specific as opposed to, like, you're just maybe having some broader macro concerns that if things kind of expand in the Middle East, that it impacts advertising more broadly called macro. So that's question one. And question 2, what are the conversations you're having with advertisers about what you can do for them with the Yahoo assets and how that might be different either than Yahoo is doing for them before or kind of how they're thinking about like where those dollars are now and why like working with you on Yahoo distribution really makes sense.
Thanks, Jason, and thanks for the support for Israel. We all are -- that's on our minds, all of our minds constantly right now. So thanks for that. In terms of your question about the Q4 guidance and what we're thinking there. So first of all, obviously, we're really happy with our performance in Q3. So we had a big beat on all metrics, which is great to see. Generally, looking forward, we wanted to be conservative. We didn't want to assume the same level of outperformance would continue. So we're just trying to be conservative there.I will note, we saw a relatively normal seasonality in October. So there wasn't anything really unusual in terms of what we're seeing. So net-net, overall, we were just trying to be conservative. We did raise the midpoint of EBITDA and non-GAAP net income because we feel very good about our cost containment. But we are trying to be conservative on the revenue side.
Yes, Jason, thanks for the notes as well. So with regards to Yahoo, there are few things that we're seeing. First of all, it's already getting some traction, as I mentioned on the call. And that's good for us because it validates what we assumed back then when we partnered with Yahoo that the quality of supply and what advertisers get, the value they get is higher than the average value they get in general. So it's very good for them. So now this is -- as we progress, we can continue to showcase that to net new advertisers and existing advertisers as we wanted to spend more.The second thing is that there's a whole slew of kind of journey in which Yahoo. If you look at the type of supply they have now, it's a lot of kind of homepage and great placements that today Taboola traditionally doesn't have a lot of. So most of our supply today, and what we recommend to to consumers is bottom of articles for the most part.And Yahoo is quite the opposite. It's a lot of kind of these high impact homepage placements. So for advertisers, it's a great mix of basically consumers in multiple touch points. So I would say that. And also, over time, we'll be able to come up a new formats that we're also excited about, again, as it relates to homepage placement, specifically.So I would start with one. It's very valuable. It works, which is great. And two, it's a very new type of supply versus what Taboola. And I think in general, what a lot of the open web has to offer given how Yahoo were successfully launching their homepage with consumers. So I would say quality of advertiser success, homepage and format.
Our next question or comment comes from the line of James Kopelman from TD Cowen.
First one is for Adam. On Generative AI, as you mentioned 25% of self serve's creative is based on Gen AI tools. I'm curious, in terms of advertiser feedback; do you find that clients are adopting these tools primarily because it's helping them save time and creative resources? Or is it more that Gen AI is also helping drive better conversions? Or is it some combination of both? And then you also mentioned that Gen AI can help you improve yield. Could you also remind us how yield is trending in Q3 more broadly? And I'm curious if it's been recovering along with the recent ad market stabilization. And then I have a follow-up for Steve.
Okay. I can start and let's see if that if I answer your question. So on Gen AI, we're getting kind of like both feedbacks from clients. We're seeing that, first of all, as I mentioned, over 2% of our revenues now with Gen AI, which is because a lot of our business is direct and its performance advertising driven, our clients, they only do what works for them and they continue to do it so long that it works.So that's a good feedback from the market that Gen AI is not only something that drives productivity, and of course, helps them save time and get more campaigns going and diverse campaigns, because it gives them such a good offering automatically. But we also see that's voted by the field in the way that revenue has been growing attached to Gen AI.So I do like it. And I hope that over time, more and more of our revenue will be driven. Like I said, a vast majority of our revenue next year, I expect to be using sophisticated AI in general like next conversion and rollouts and other things, but then also with Gen AI. So that's very important to us.And I think from a yield perspective, as you know, it's -- about half of our technology organization of R&D is working on performance advertising success and yield expansion. So this is top of mind for us. Given how much supply we're adding and the trends of our yield today, which -- I would say it's mostly flat today or in line with the seasonality we expect, which to me is encouraging given how much supply we're adding.I do expect expansion in 2024 of that, given our investment in yields. As I mentioned, it's a lot of what we do. And I think mainly driven not by the market's recovery, but mainly our internal investment in technology. So I don't wait for the world to get better. Taboola will make it better.
And then, for Steve, in terms of the Yahoo investments, earlier in the year you identified, I think, roughly $30 million in Yahoo-related expenses for 2023. Is that still how you're thinking about the size of that investment for this year? And then taking a step back, obviously, only November, but can you remind us how far along we are in terms of the overall investment for the integration, both 2023 and 2024 to get us to the full ramp point of the next year.
Sure. So first of all, we've managed to figure out ways to cut down on the amount of increased costs that we expect to have from Yahoo. So that's been a good thing. That's one of the reasons that we've -- part of the cost discipline that I've talked about and part of the reason that we're ahead on adjusted EBITDA. So I don't expect the full $30 million anymore. So that's good. I think in terms of thinking about how much are we investing and where are we added -- where are we in terms of the investment. I think I said in my prepared remarks that most of the increase in operating expenses in Q4 is really around 2 things. It's mostly investment in Yahoo with a little bit of investment in our e-commerce business as well, both of which are ahead of the revenue. So that's why the cost is up a bit more than the revenue. So that's -- if you want to see how much we are investing, you can kind of look at the delta of our operating expenses in Q4. And that gives you a pretty good idea.I would say, as of right now, we expect most of the hiring that we need to support the transition of the Yahoo business to Taboola to be done by the end of Q1. So we're in that ramp phase yet. It's not all there yet. But it will probably all be added by the end of Q1.And just as a reminder for everybody, in terms of the revenue, we're starting to transition to advertisers now. The impact on Q4 will be small, but then will be fully ramped by the middle of next year.
Our next question or comment comes from the line of Laura Martin from Needham.
So I wanted to ask about -- so my net revenue ex-TAC is down 1% despite the fact that we're selling new Yahoo Ad well. We have strong growth in Microsoft of 2x, e-commerce of double digits and News revenue's growth. So my question is what's falling? Is it just the yield, because we're bringing all these new ad units on for Yahoo and we're not bringing on their new demand? What's going wrong that's offsetting all these wonderful growth categories that you wrote that in the press release, Adam?
Yes, I'll take it. So it's actually -- if you look at the business, right, the core supply of our business and the core business in general is very strong. We're winning publishers. We're investing in yield expansion. Q3 revenue is up over last year, 8%, Q4 is 17% up versus last year. The main thing that is still affecting us is which we're carrying from the end of 2022 is the decline of yield in 2022. So because the yields went down throughout the year, the beginning of 2023, it was just the pie was smaller. And that's something that we're still carrying and so we're still seeing that in our results.But as we're going to expand yield and like I said, I do expect it to go up and right in 2024, we're going to see that recovering and again, mainly because of our investment as a company. So the main thing that creates this optics is that end of 2022 and how we started 2023.
Let me also just add that if you look at the midpoint of our guide, we are expecting gross revenue to grow 17% year-over-year in Q4 and ex-TAC to grow 8% year-over-year in Q4. So we're basically returning to growth. We're just lapping some tougher comparables from before yield declines happened in 2022.
Okay. Super helpful. My second one is on one of the things -- I am glad you're reiterating 2024, the $200 million and the $100 million of free cash flow as well. My question to you, Adam, is the use of cash to prepay more debt and repurchase more shares with that huge step up in free cash flow and EBITDA implies that you don't actually have a better return on capital use of funds, which would imply that you don't think there's something in the fundamentals of your business, you can invest in and it's a higher return. So could you speak to that why shrinking your capital structure is their highest return on capital?
Yes. So I think -- let me jump in, Laura, Adam would love to answer it, but he pointed at me. So I think what I would say is, we can fund all the investments that we want to do in our business out of our existing operating cash flow. So we really don't need to use any of the cash that we are going to use on share buybacks or debt repayment to fund any sort of new initiatives.And we think -- I think we've talked about this in the past. We think of R&D as an investment and that's where we spend our money. We think we're investing the right amount right now in those new initiatives. I think there's a natural limit in terms of how many things any one company can do.And we have a lot of investment initiatives going on. We've got investments going on in e-commerce. We're bringing on Yahoo. We've got our performance advertising investments. We, obviously, are continuing to invest in our bidding platform. So we're investing in a lot of things. We think we're investing in the right amount and yet we're still able to generate excess cash flow.And we think, right now, frankly, buying back shares is a very good use of our cash because we think there's a good return on that and debt's getting expensive. So we do want to pay that down. So we have enough cash flow that we can do all of those things.
And just one more note to add is that, we also, as a management, we care about free cash flow per share. So buying back share helps us and our investors to kind of track that over time as we kind of stabilize our share count. So that's another thing that we care about. And we hope over time, we can spend more time on.
Okay. That's super helpful. My last one is there's a lot of industry pressure on made for advertising websites. Could you talk about whether you get caught up in that category and that negative sort of feedback loop from a lot of industry, a lot of industry criticism right now of that type of website?
Yes, of course. So we monitor the industry discussion. I'll tell you. We're not concerned about it as it relates to us. We have a small single-digit percent of revenue spent by publishers of all kinds. So it's small from an exposure perspective. And we feel good about our leadership with our policies and our moderation team. We have about 100 people working full time, kind of making sure that we adhere to those policies. And we support the industry trends towards making sure that advertisers know exactly where they spend and what value they get. So I think it's a very good discussion to have. And as a company, I think we're in a good place.
Our next question or comment comes from the line of Andrew Boone from JMP Securities.
Adam, I wanted to go to a big picture question in terms of the strategy of the Yahoo deal in the first place. We've talked about in the past the benefits of scale and so just to relate back to where we are today, right? Like how is scale playing through and benefiting the overall platform for Taboola as it relates to today? And then how do we think about that for '24?
Thanks for the question. This is maybe one of the main thing that keeps me excited as it relates to our journey over the next 3, 4, 5 years. Because, I think, today for advertisers, and it's -- I think it's always important to take the point of view of the clients.When advertisers, and about 10 million of them spend on Google and 10 million about spend on Facebook, and we're seeing the growth of advertisers spending with Amazon. And we've seen how more and more businesses -- Nvidia is spending so much energy on making sure that advertisers are supported, because everyone sees the opportunity with the advertising sector.I think when you -- their point of view is it's uniquely complicated to buy open web today. You have dozens of companies. And they're all in the sub-billion-dollar range revenue scale. And then they have -- each have different platforms, different account management team. It's just too much. It's too complicated too much.And I think for the most part, there's a very few amount of companies that actually have direct relationships with advertisers, right? We had about 18,000 clients working with us directly, which I'm proud of. But imagine Taboola with 30,000, 40,000, 50,000 or 100,000. But to get there, to get to the point that advertiser says, we need, Taboola is a musthave. We need a Taboola strategy, we have to be bigger.I think when we get Yahoo fully ramped up and we get to our, call it, $2.5 billion run rate, we're bigger than Twitter, right, at that point. We're in the same realm as Snap and Pinterest. At that point, it's a whole different area code.And I hope this is our one level up. I play Zelda these days, so this is when we get the master sword. This is where we get -- become invisible and we're one level up. And advertisers will say, well, we can't ignore this open web opportunity, search for Google, social Facebook and Taboola.And that's not where we want to end. We want to get to $4 billion and $5 billion in revenue and truly become an alternative to the walled gardens. So I see Yahoo as a great partner, and amazing source of supply, which is exclusive to Taboola as it relates to native, a lot of formats, a lot of homepage, a lot of goodness that has that with us.And I think it's going to get us one step forward kind of get it outside of the ethic as it is today, nothing wrong with that. But I do want Taboola to be just one step out bigger advertisers build strategies with us.
And then you guys in the past have talked about bidding being a $1 billion-plus opportunity, understood the very good commentary on Microsoft this last quarter. But talk about the path to be able to make about $1 billion opportunity. Where are you guys today and what needs to have to go to that goal?
Sure. So yes, I'm very happy. First of all, I'm always happy when we tell something to our investors and analysts and a year after it happens on time. So I'm very happy that Microsoft is double what it was a year ago, which is what we thought is going to be and it is. So that's -- first of all, that makes me happy as we're still a new public company and we're trying to build trust with our community. So I think over time, this is going to be our bidder technology. And there's a lot of work here, right? We're still new to start up within Taboola. It's a start that makes hundreds of millions of dollars, but it's still a start-up. We're going to plug that in across all of our publisher base. This is still early stages. And we want to do a good job.And the way you want to think about it is, every display inventory that exists across our 9,000 publishers, which I think those display inventory, today, they probably generate $20 billion, $30 billion. If we take 10% of it or 5% of it, this is a good $1 billion. And then you have Yahoo, which has a very significant display business, which I also hope to be 5%, 10% of.And then you have just other areas where we can bid into that completely sit outside of a browser, like CTV perhaps and other places. So over the next 3, 5 years, at the very least, I want to be part of our core display ecosystem. So that's 9,000 publishers in Yahoo, and I want to take a 5% of it or 10% of it. If that takes us 3 to 5 years that's a good $1 billion or more. And then over time, I think, we can get our bidder integrated into kind of non-browser environment such as CTV and others. But that will take some time. But that's how we get to $1 billion and more.
Our next question or comment comes from the line of Dan Day from B. Riley Securities.
So just a quick one for me. You talked about your focus in the near term here being migrating spend over to Taboola for the Yahoo inventory. Just maybe if you could give us a peek into what your game plan is to make that happen as quickly as possible and as effective as possible in terms of migrating budgets over? Is it just salespeople reaching out to get test budgets over, you have incentives in place to start moving budgets over? And then is there a plan down the line to deprecate the whole Gen AI platform that maybe might get people using it to start at least testing on the Taboola platform.
Sure. I'll jump in on that one, Dan. So first of all, yes, there are detailed plans in place. I don't want to get into too many specifics because it's obviously getting into the weeds in terms of how we're working with a key customer like Yahoo. But what I can say is we've said all along that we would start migrating, the advertisers in the back half of the year. You obviously all saw the announcement that the supply is now fully available through the Taboola platform. So that has started now. We're making good progress. We feel good about where we're at.I think Adam mentioned that it's really nice to hear stories of some of the advertisers that have migrated over and how they're finding -- having a good experience. I heard about one advertiser just last -- earlier this week or maybe it was late last week, it all bodes together.But about how they are hitting record levels of spend versus what they've ever done with Yahoo directly and in fact, are now spending more with us than they are with Meta, which was kind of amazing to hear.So I think so far, progress is encouraging. Our sales teams have a plan that they're executing on. I don't want to get into all the specifics there. But we're making good progress. And we still feel very good about getting it fully migrated by middle of next year and being at full ramp starting in Q3.
Great, Steve. Just other one. We did hear yesterday from peer about revenue headwinds from an increase in publisher paid views attributable to the war-related content, advertisers blocking those for brand safety, suitability reasons, just making it more challenging to monetize those incremental page views. So just wondering, if you guys have seen anything similar over the last few weeks?
Yes. So I mean we, obviously, have business out of Israel, so about 10% of our revenue in Q3 came from Israel. But that revenue, most of it is what we call export revenue, which is businesses -- advertisers that are actually trying to reach consumers in other countries, U.S., U.K., wherever they're trying to reach those consumers, that's not in Israel. And that tends to be much less affected by what's going on.Only around 2% of our revenue is what we would consider domestic Israel revenue, which is advertisers spending on Israeli publishers. And because of that, we're not seeing a huge impact. And in fact, by the way, on those publishers, traffic is up, revenue is down. So it kind of offsets itself somewhat. So it's a small enough portion of our business that we're really not seeing an impact overall in our business.Obviously, we're monitoring pretty closely though because we need to see if it spreads or if anything more happens, but as of now, we're not seeing a material impact.
Our next question or comment comes from the line of Sergio Segura from KeyBanc.
2 questions. First on Max Conversions, how broad has that adoption been? And how has that impacted net dollar retention per campaign using it? And when should we see a full adoption of that product?And then for Taboola News, great progress towards the $100 million in revenue. How should we think about the drivers for the next $100 million in revenue?
I can start and Steve feel free to jump in. So on Max Conversion, first, it's like I said in my letter, it's great to see the adoption, it's about 30% now of our revenues being adopted with Max Conversion, which is a level set is one of our recent sophisticated AI that helps clients and advertisers share their business objective with us, but not have to provide a CPC, which is very common in ad tech, but not common in with Google and Facebook. So we're now -- we look more like a Google and Facebook from the advertiser point of view. And it's our fastest-growing adopted product, since I started Taboola in 2007. So that's pretty awesome to see.What's good about it, it does affect NDR. I think we shared this -- I'll let Steve check it. But I think we shared in our letter and press release some numbers. But it does affect NDRs. So I will tell you, advertisers, the [ course ] of clients who use AI and Max Conversion, they see better NDRs as well as lower churn. And these are kind of the leading, 2 leading indicators that we're tracking as a company and we have aggressive goals toward improving them.So and my expectation is that this will be -- the majority of our revenue in 2024 will be driven by AI and Max Conversion as well as the next iteration, which will be ROAS. And that's where advertisers can optimize for revenue as well, not just conversion. So this is the whole road map into 2024. In fact, just before this call, I had an hour calls with our VP, products on that. And it's very exciting to see what we plan to do.As it relates to Taboola News, there's a bunch of things that were going there. First of all, it's a great business on its own because it helps our core business get stronger, it's very synergetic. So if there's a win-win orientation there, we send traffic to our publishers. They grow audience, especially in terms of the open web that could use more attention.And in general, we're growing that business in a few ways. One, existing relationships with Xiaomi and Samsung and OPPO and realme, and others, we can get to more markets for them. So there's a geography expansion. And that's going to help us get more users.The second thing is get more touch points. So if you look at many of our OEMs today, they tend to work with us in one or 2 touch-points. But not all of them at the same time and there's an opportunity there. So they might have us on the lock screen, they might have us in the minus 1, they might have us in a notification when they send news to consumers. They might have us in the browser. But a lot of times, they just start in a certain integration and they grow it over time. So there's a whole vertical expansion opportunity with existing OEMs and how much more we can do with them.And then you have other kind of mid-sized OEMs. And all of that is before working with carriers, which we have not yet really done. So over time, you can imagine Taboola supports not only OEMs directly, but perhaps carriers. And again, this is 5, 10 years roadmap for this business. So there's a lot of ways that can become hundreds of millions of dollars and in fact, even more.
Our next question or comment comes from the line of Mark Zgutowicz from The Benchmark Company.
Steve, just curious on the Yahoo advertiser migration. I'm just curious how much visibility you have on making that happen there by mid-2024. Just maybe more specifically, do you have like a concentration of advertisers that have committed to moving over after the seasonal holiday period? And then just in terms of e-com, just broadly speaking, can you talk about how your go-to-market there is perhaps evolving and sort of what types of new client engagements you're seeing?Obviously, you're having some continued pretty strong growth there, but just maybe how that strategy is evolving.
Sure. I'll start with the Yahoo advertiser migration question. So I think we have very good; we're partnering very closely with Yahoo on this. It's in Yahoo's best interest to help us with this migration because obviously, the revenue that those advertisers bring flows back to them largely. So there -- we're working hand-in-hand with them. We have good visibility from working with them on what we need to do. We obviously know kind of what the concentration is and which advertisers we need to move, like that's what we're working with them on.So I think we have very good visibility. I think we have a pretty good notion of what we can get done on that. So I feel good that we have what we need. We have the visibility. And we have a plan in place with them to help make it happen.
Yes. So about e-commerce, first of all, I'm very happy with our decision -- strategic decision to acquire Connexity and get into e-commerce in a significant way. I think it's going to play a very important role in the future of Taboola as well as the future of the open web. So it's a very lucrative part of our business that will continue to be such. And we're seeing that in the results of our business.So I mentioned that we saw double-digit growth in e-commerce in Q3. And that is driven by a lot of what we said we'll do; international expansion in Europe, the synergy with Taboola and now Yahoo as a source of supply on top of what Connexity had before.I'll tell you, Taboola is now a top 10 partner to e-commerce buyers. So retailers now when they see where is, traffic coming from Taboola is now in top 10 traffic source, which is great. And we're signing new clients. As you know, we're investing more in growth, more sales outside of the U.S. So we're seeing in EMEA and APAC new clients and new affiliate partnerships; so all of that is great.And as it relates to our business, it's trending to be about 20% or almost 20% of our ex-TAC, which is because it's a very premium consistent, reliable source of revenue. And over time, I think that's going to -- that has a chance to be in 1/3 of our business as well as 1/3 of our publishers.We're seeing some publishers that now make as much money from e-commerce as they make from native advertising. Some of them even make more than from e-commerce. So if you think about that future, that means if you're not in e-commerce and you don't have an e-commerce offering, you may become irrelevant over time. So that makes me happy.
And Adam, just in terms of capacity to address the e-com, opportunity, how would you characterize that in terms of having enough capacity to address, obviously, a big opportunity?
Yes. So I'll jump in on that. I think -- so when you say capacity, I assume you're talking about people resources and the other resources we need to run the business? Is that kind of how you're -- what you're thinking about?
Right, sales strategy, broadly, sales capacity.
Yes, I hear you. What's interesting is -- and I think we said this at the time that we acquired Connexity. This is a business that makes very good revenue, very strong EBITDA, is run by a private equity firm for a long time. Despite the fact that frankly, in our view; it was probably underinvested in, in terms of looking for seeking growth. So I think what we're doing right now is we're investing more resources into growth areas for Connexity and for our e-commerce business more broadly.So for instance, we're bringing on more salespeople to sell new merchants in the U.S. and abroad. We're helping them expand internationally into territories where they really didn't have a strong presence historically. And then we're also taking advantage of other synergies that work with our core business.For instance, we disclosed in our shareholder letter that and in my prepared remarks that actually Taboola Feeds are now a top 10 supply source for our e-commerce advertisers or our merchants as we call them. So it's been a success story in terms of all the good things that are going on there.And I think I would characterize it as we have what we need to run the business. I think there's still opportunity to invest more and grow faster over time and that's really what we're doing now. So that's -- in Q4 here, I mentioned that there's really 2 areas that we're investing more people in, and that's Yahoo and e-commerce.And it's because we think there is potential to grow e-commerce even more and faster. So I'd say we have what we need to keep it going. We probably can invest more to grow it faster.
I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Adam Singolda for any closing remarks.
Thanks, operator, and thanks, everyone, for joining us today. As you can see from our results, we feel very good about our performance this quarter and where we're going. There are many, many things that are going strong Taboola News, e-commerce, our AI-powered bidding technology with Microsoft and others, our core business, which is well positioned and only getting stronger with Yahoo and our massive investment in performance advertising technology to drive yield expansion. And like I told you, that's one of the key things that can double and triple Taboola over time on its own.I look forward to 2024 to arrive. It's going to be an important year for us as we make big steps forward towards to come in the very first ever large-scale must buy advertising company in the open web.I'll finish my summary here with the same way I started the call today. I want to send our employees in Israel and their families my payers. My heart is with all of you and I think about you all the time. And I want to thank everyone for the hard work at Taboola and the dedication, especially given what's going on in the world.And to our investors, thanks for the support and interest and here is to a great, great 2024.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.